When a Chapter 7 “Asset Case” Is Not a Bad Thing

There are certain rare but potentially very helpful situations in which you would be happy to hand over some of your assets to your bankruptcy trustee.

Your Usual Goal — a “No-Asset” Case

When you file a bankruptcy case, you usually want to keep for yourself whatever possessions you own. And most of the time that’s what happens. Bankruptcy is intended to give you a fresh financial start, and property “exemptions” allow you to protect a certain amount of your possessions so that you are not starting from nothing. The goal is to have everything that you own be covered by “exemptions” so that you have nothing to give to your Chapter 7 trustee for distribution to your creditors, a so-called “no-asset” case.

Sometimes a Better Idea — an “Asset” Chapter 7 Case

But every once in a while, it can actually make sense to file a bankruptcy case knowing that you own something that is not exempt. Sometime it makes sense to give that to the trustee to sell and pay the proceeds to your creditors. It takes the combination of the following:

  1. You have little or no use for some assets, and don’t want to take the time or energy to sell them. Or you can’t wait but must file your case quickly to stop some creditor’s aggressive collection action against you, such as a vehicle repossession or garnishment.
  2. You owe a certain debt that is not going to be discharged in bankruptcy, which also happens to be one that the law requires the Chapter 7 trustee to pay ahead of your other creditors

Practically speaking, when you are thinking about filing for bankruptcy it’s often about choosing between a “straight” Chapter 7 and a payment plan Chapter 13. Chapter 7 usually takes about three months until it is done (although an “asset” case takes longer), while Chapter 13 takes three to five years. Although Chapter 13 can be a great way to hang onto your possessions and to do a number of things that you can’t do in Chapter 7, its downsides — including its duration — can make it quite unattractive. That’s why giving up something you own in Chapter 7 can be the better way to go, especially if some of the proceeds of its sale are likely to go to a creditor you need or want to be paid.

How the Chapter 7 Trustee Could Pay Your Special Creditors

Bankruptcy law requires the Chapter 7 trustee to pay certain types of creditors in a very specific order (from the proceeds of the sale of your nonexempt possession(s)). It is not unusual for that order to match your own preferences about which special debt(s) to pay first.

Your ordinary “general unsecured” debts do not receive any payment from the trustee until your special “priority” debts are paid in full. Also, those “priority” debts are paid in a very specific order among themselves, with the higher priority ones being paid in full before any money goes to the next kind of debt on the list. This list is laid out in Section 507 of the Bankruptcy Code. The two most important debts on that “priority” list that you may well want to get paid are:

  • Child and spousal support arrearage
  • Income taxes under certain conditions, and certain other kinds of taxes.

An Illustration

Imagine if you had a small business that was failing so that you were considering filing for bankruptcy. Filing an “asset” Chapter 7 case could make sense if you owned about $4,000 of nonexempt business inventory and equipment that you didn’t need in your future employment AND owed $1,500 in back child support, which you very much need to be paid, plus $3,000 of income tax to the IRS for 2011, which would not be discharged in bankruptcy and so would have to be paid as well.

After you would file a Chapter 7 case, the trustee would get the leftover business equipment and inventory. He or she would sell it and, assuming a sale price of $4,000, would then pay your back child support in full, plus as much of the IRS debt as there was money available to pay. Be aware that the trustee would pocket some of the sale proceeds as a fee for his or her efforts. Also, the trustee and bankruptcy law would control the process, so you’d have no say about, for example, the sale price of the equipment. However, this may enable you to avoid filing a Chapter 13 case. Plus, you could avoid the delay and headaches of selling those business assets yourself. And icing on the cake — most of the proceeds of the sale of your business assets would go where you would want them to anyway, toward debts you would want to be paid.

If you are in the Dallas-Fort Worth metroplex, let us help you make the right decisions about your bankruptcy options. Please call us at 972-772-3083 to schedule a no-obligation, free, confidential consultation. Or, contact us here .

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